WEBVTT - John Authers, Christine Harper Discuss ‘Capital Ideas’ 0:00:02.240 --> 0:00:06.840 This is Master's in Business with Barry Ridholts on Bloomberg Radio. 0:00:07.360 --> 0:00:10.200 For the long holiday weekend, We're gonna try something a 0:00:10.240 --> 0:00:14.720 little different. My Bloomberg opinion colleague John Authors has begun 0:00:14.840 --> 0:00:17.799 an online book club. He looks at some of the 0:00:17.880 --> 0:00:21.880 classic and new books on the world of finance and investing. 0:00:22.680 --> 0:00:25.759 Joining us is Christine Harper. She is the editor in 0:00:25.840 --> 0:00:30.880 chief of Bloomberg Markets. John is the quintessential Englishman in 0:00:30.920 --> 0:00:34.440 New York. Before joining us at Bloomberg, he spent twenty 0:00:34.520 --> 0:00:39.159 nine years at The Financial Times. The first book in 0:00:39.360 --> 0:00:42.800 John series is from Peter Bernstein. For those of you 0:00:42.840 --> 0:00:45.920 who are not familiar with Peter Bernstein, he is the 0:00:47.120 --> 0:00:50.519 Michael Lewis of his day. He began writing in the 0:00:50.560 --> 0:00:54.920 sixties and seventies. The book that we talk about today 0:00:55.160 --> 0:00:59.520 is Capital Ideas, The Improbable Origins of Modern Wall Street. 0:01:00.320 --> 0:01:05.520 Bernstein published this in You probably are familiar with some 0:01:05.600 --> 0:01:10.320 of Bernstein's other work. I Just Adore Against the Gods. 0:01:10.360 --> 0:01:14.600 The Remarkable Story of Risk Uh probably his best known work, 0:01:14.760 --> 0:01:19.039 which tells about the rise of probabilities and statistics and 0:01:19.160 --> 0:01:25.520 actuarial tables and the insurance industry and why modern finance Oh, 0:01:25.720 --> 0:01:30.480 such a great debt of gratitude to the early people 0:01:30.480 --> 0:01:34.280 who were working on statistics and mathematics. You know, back 0:01:34.319 --> 0:01:37.000 in the day when ships would go overseas and try 0:01:37.040 --> 0:01:41.440 and come back with spices, it was a risky and 0:01:41.560 --> 0:01:46.360 dangerous venture. The ability to ensure those trips, the ability 0:01:46.400 --> 0:01:49.600 to figure out the odds of safe return and build 0:01:49.640 --> 0:01:54.760 in a reasonable um compensation for those who didn't come back, well, 0:01:54.880 --> 0:01:57.360 that was really really important, and that was developed by 0:01:57.360 --> 0:02:01.760 early statisticians, and probability for your risks. Eventually that becomes 0:02:01.760 --> 0:02:04.840 the modern insurance industry. John wanted to focus on a 0:02:04.880 --> 0:02:09.119 book of Peter Bernstein called Capital Ideas, The Improbable Origins 0:02:09.160 --> 0:02:12.720 of Modern Wall Street. It tells the history of how 0:02:12.919 --> 0:02:17.560 modern finance developed, and really it's quite fascinating, tracing the 0:02:17.600 --> 0:02:20.799 pioneering work of early scholars to the development of new 0:02:20.919 --> 0:02:25.680 theories on risk and valuation and returns. Really a very 0:02:25.720 --> 0:02:29.799 interesting book. So let's jump right into our conversation with 0:02:30.000 --> 0:02:34.800 John Authors and Christine Harper discussing Capital Ideas by Peter Bernstein. 0:02:35.480 --> 0:02:38.920 What made you guys start with this book? Given the 0:02:39.440 --> 0:02:42.560 what is it three hundred thousand books published annually plus 0:02:42.600 --> 0:02:46.440 the seven hundred thousand self published. Uh what what made 0:02:46.440 --> 0:02:50.880 you go back to Peter Bernstein as the first book 0:02:50.880 --> 0:02:55.040 to experiment with this? I feel it's very important actually 0:02:55.120 --> 0:02:56.960 to look not just at the books that have just 0:02:57.120 --> 0:02:59.680 come out, but at the books that have been that 0:02:59.720 --> 0:03:02.840 have come before, and that we may no longer have 0:03:02.960 --> 0:03:05.639 been paying attention to, because often there is information that's 0:03:06.280 --> 0:03:09.720 hidden there in in clear sight. I'll give you one 0:03:10.040 --> 0:03:15.400 anecdote to back that up. Donald steel of the Barlat 0:03:15.480 --> 0:03:19.359 and steel Um Investigative Journalism Partnership. They want a bunch 0:03:19.360 --> 0:03:22.240 of bulletz is for investigati journalism at the Philadelphia Inquirer 0:03:23.000 --> 0:03:26.280 came and gave a talk while I was at journalism 0:03:26.280 --> 0:03:30.280 school too many years ago to think about now. Somebody asked, 0:03:30.400 --> 0:03:33.040 where do you get most of your scoops from? Where's 0:03:33.040 --> 0:03:36.040 your main place you get your scoops? And we were 0:03:36.080 --> 0:03:41.520 all expecting from you know, underground, dark park car parking lots, 0:03:41.520 --> 0:03:45.360 from anonymous sources or whatever, and he said, from rereading 0:03:45.400 --> 0:03:48.720 my old notes, you find out you talk to people, 0:03:49.040 --> 0:03:51.600 you talk to twenty more people, and then when you 0:03:51.640 --> 0:03:53.200 go back to the first person you talked to, you 0:03:53.280 --> 0:03:56.840 realize now what the critical question is and that they 0:03:56.840 --> 0:04:01.880 answered it for you. And I then discovered I've not 0:04:01.880 --> 0:04:05.360 written that many books myself, but I've discovered precisely that 0:04:05.680 --> 0:04:09.240 has happened that on trying to unlock the key of 0:04:09.240 --> 0:04:12.240 a narrative, try to say something clearly, it's often going 0:04:12.280 --> 0:04:16.400 back to much earlier transcripts that had sort of said 0:04:16.600 --> 0:04:18.919 your treat become a sentiment in my mind, and that 0:04:19.000 --> 0:04:23.080 I hadn't actually re examined, actually gave me precisely the 0:04:23.120 --> 0:04:29.240 clarity answered the questions that I was asking again forgetting 0:04:29.240 --> 0:04:30.919 that I actually had the answer to them sitting in 0:04:30.960 --> 0:04:34.440 my notebooks. So that's one critical part of it. I 0:04:34.480 --> 0:04:37.280 feel very strongly that we shouldn't just be looking at 0:04:37.279 --> 0:04:39.760 the books have just come out. In the case of 0:04:39.800 --> 0:04:44.360 capital ideas, Partly it's very very good nobody was going 0:04:44.360 --> 0:04:47.760 to say this isn't a very well written book, um. 0:04:47.839 --> 0:04:50.799 And also I thought it was very important to look 0:04:50.920 --> 0:04:56.080 at these ideas written at a time before the crisis, 0:04:56.240 --> 0:04:58.919 because for the last ten years I'm as guilty of 0:04:58.960 --> 0:05:02.200 this as anybody else. The crisis was the most exciting 0:05:02.279 --> 0:05:04.720 period any of us who have been long term financial 0:05:04.760 --> 0:05:08.560 journalists or working finance have ever known, and for the 0:05:08.640 --> 0:05:10.960 last two years, it's been almost impossible to look at 0:05:11.000 --> 0:05:14.800 anything other than through the prism of that crisis. And 0:05:14.839 --> 0:05:18.920 that's particularly true of some of these ideas that are 0:05:18.920 --> 0:05:21.039 mentioned by by BENSTI I thought it would I thought 0:05:21.080 --> 0:05:22.839 it would might be very revealing to take a look 0:05:22.839 --> 0:05:27.120 at them, what people were saying about them. Isn't it 0:05:27.160 --> 0:05:30.799 true that whatever we're looking at, you know, the expression 0:05:30.880 --> 0:05:34.960 is every general fights the last war. Don't all market 0:05:35.320 --> 0:05:40.760 commentators and indeed traders and investors have their perspective colored 0:05:40.760 --> 0:05:44.920 by whatever the last big disaster was. We would still 0:05:44.960 --> 0:05:48.000 be talking about the dot com collapse and the crash 0:05:48.040 --> 0:05:51.360 of technology and why value does so much better than technology, 0:05:51.920 --> 0:05:55.880 but for the financial crisis intervening or am I overstating that? 0:05:55.880 --> 0:05:58.200 That's absolutely right? And I think one of the one 0:05:58.240 --> 0:05:59.840 of the things a lesson for me and I was 0:06:00.120 --> 0:06:03.800 journalists covering the financial industry during the crisis, and I 0:06:03.839 --> 0:06:07.640 think that very much colored my perspective on finance in 0:06:07.680 --> 0:06:12.760 that I saw the reliance on financial modeling and sort 0:06:12.760 --> 0:06:18.760 of statistical assumptions as flawed, given them flaws that were exposed. 0:06:19.160 --> 0:06:22.120 And what was valuable to me in reading capital ideas 0:06:22.240 --> 0:06:25.839 was recognizing in that book how important those models were 0:06:25.880 --> 0:06:28.320 and that they just haven't been with us all forever. 0:06:28.480 --> 0:06:31.960 They had to be created and they were very valuable. 0:06:32.000 --> 0:06:35.240 Maybe they were taken too far. I think people would 0:06:35.839 --> 0:06:38.640 mostly say they were, but without them we would be 0:06:38.680 --> 0:06:41.640 in equally as much trouble. So that everything is sort 0:06:41.640 --> 0:06:44.760 of a reaction to the last problem we had. And 0:06:44.760 --> 0:06:47.040 with capital ideas, there were too many people who just 0:06:47.160 --> 0:06:51.000 thought human judgment was the way to pick company stocks, 0:06:51.560 --> 0:06:55.040 and um, you know, they showed there's actually systemic you know, 0:06:55.200 --> 0:06:57.800 analysis that should go into it. But maybe we went 0:06:57.839 --> 0:07:00.120 too far and there was too much systemic analysis, not 0:07:00.240 --> 0:07:02.839 enough judgment. What what do you what models? Do you 0:07:02.880 --> 0:07:04.840 think we're pushed too far? And it's one thing if 0:07:04.880 --> 0:07:09.720 we talk about um, the Gaussian Coppla and things like that, 0:07:09.800 --> 0:07:16.240 but specifically these are really very basic ideas that eventually 0:07:16.280 --> 0:07:19.680 got implemented. It's kind of funny to read, oh, this 0:07:19.800 --> 0:07:22.640 is the person who figured out that reward is a 0:07:22.680 --> 0:07:26.760 function of risk. I just always assumed because it's been 0:07:26.800 --> 0:07:30.200 so fundamental to me, it's hard for me to imagine. 0:07:30.240 --> 0:07:33.880 So the parallel is, you know, kids today who play 0:07:33.920 --> 0:07:38.760 with iPads and technology and apps, there is no, online 0:07:38.760 --> 0:07:42.160 and offline. There just is if you're old enough, oh 0:07:42.200 --> 0:07:46.640 this is online, this is offline a six year old. No, No, 0:07:46.760 --> 0:07:48.720 that's just how the world is. It's digital, it's this, 0:07:48.840 --> 0:07:51.880 it's that. So to me, risk and reward have always 0:07:51.880 --> 0:07:54.120 been two sides of the same coin. It's hard to 0:07:54.160 --> 0:07:57.680 even imagine what it was like. Wait, people didn't know 0:07:57.840 --> 0:08:00.520 that that your reward was a fun shouldn't have how 0:08:00.560 --> 0:08:03.360 much risk youer storm? Right? And yet there there's this 0:08:03.440 --> 0:08:06.840 a kind of inherent belief that we can measure future 0:08:06.960 --> 0:08:11.160 risk by looking at you know, John has had a 0:08:11.160 --> 0:08:14.840 lot of online discussion about this. Volatility is telling you 0:08:15.000 --> 0:08:19.480 future risk and that helps to a point, but not 0:08:20.120 --> 0:08:23.400 maybe all the time. And then also liquidity, you know, 0:08:23.520 --> 0:08:28.000 the assumptions about liquidity that we're going on during the 0:08:28.040 --> 0:08:31.440 crisis or the build up to the crisis, we're very flawed. 0:08:32.200 --> 0:08:35.320 And so those those are two things that I think 0:08:35.360 --> 0:08:38.920 we're we're problematic. I think in finance, if we essue 0:08:39.040 --> 0:08:42.080 the word measure and replace it with the word estimate, 0:08:42.840 --> 0:08:46.240 we're much better off because hey, I'm guessing this is 0:08:46.240 --> 0:08:50.000 how much liquidity will be until it evaporates, or we're 0:08:50.160 --> 0:08:54.079 estimating how much risk there is. It creates a recognition 0:08:54.080 --> 0:08:57.200 that this isn't a hard and fest measure the old joke, 0:08:57.320 --> 0:09:01.040 why do why do economists for ideata to the third 0:09:01.040 --> 0:09:03.760 decimal point to demonstrate they have a sense of humor? 0:09:04.679 --> 0:09:08.400 How did How did people respond? I would say that 0:09:08.480 --> 0:09:15.000 we had two main areas where people had a problem, 0:09:15.000 --> 0:09:18.440 other than points of people pointing out particularly nice little 0:09:18.480 --> 0:09:23.600 gems of Bernstein wisdom. The first was that many people 0:09:23.640 --> 0:09:26.600 didn't quite grasp that risk in these models has been 0:09:26.600 --> 0:09:31.280 defined as volatility, and many of them felt, I think, 0:09:31.400 --> 0:09:35.160 quite accurately, that there is much more to what they 0:09:35.200 --> 0:09:38.280 think of as risk than the version of volatility that 0:09:39.360 --> 0:09:43.880 Sharp and others put into their their their their models. 0:09:43.960 --> 0:09:46.600 Let's put a pin in in right there and and 0:09:46.720 --> 0:09:53.320 digress a bit. Why do you believe people think volatility 0:09:53.640 --> 0:09:59.520 is equivalent to risk? It's, largely speaking, that's how it's defined. 0:09:59.640 --> 0:10:03.440 If you look in the models that in its final form, 0:10:03.440 --> 0:10:07.160 I guess Bill Sharp comes up with, and the Sharp ratio, 0:10:07.200 --> 0:10:09.120 which we're all used to as a risk adjusted return 0:10:09.280 --> 0:10:12.440 is is the return divided by the standard deviation, and 0:10:12.480 --> 0:10:19.320 so it's um And while it's plainly very important to 0:10:19.400 --> 0:10:22.280 grasp that you get money, you're you. You get money 0:10:22.280 --> 0:10:24.080 by taking a risk that if you really want to 0:10:24.080 --> 0:10:26.680 make yourself rich, you're going to have to take a chance. 0:10:27.640 --> 0:10:34.280 Um the risk that people are bothered about. For many institutions, 0:10:34.280 --> 0:10:37.880 it's about matching their liabilities, meaning the future obligations they 0:10:37.960 --> 0:10:42.960 have on a even surprisingly to know. Even endowments are 0:10:42.960 --> 0:10:46.600 worried about whether they can match their commitments for the future. 0:10:46.880 --> 0:10:50.720 And it's about to draw down. It's not about will 0:10:51.120 --> 0:10:55.200 this return waggle around a long way over the next 0:10:55.200 --> 0:10:58.400 thirty or forty years, but on balance particularly I don't 0:10:58.400 --> 0:11:00.240 have to access it all at one time. We're going 0:11:00.280 --> 0:11:02.720 to be fine. It's is it going to do very 0:11:02.760 --> 0:11:05.480 well for a long time and then crash and I'm 0:11:05.559 --> 0:11:09.200 never and subject me to a drawdown I never quite 0:11:09.280 --> 0:11:13.640 recover from. Uh. And that is much closer to the 0:11:13.760 --> 0:11:16.760 version of risk that people had in mind, and it's 0:11:16.800 --> 0:11:20.960 not the version of risk that's enshrined in in capem. 0:11:21.080 --> 0:11:23.120 The one from the book that I really liked was 0:11:23.760 --> 0:11:27.640 more things can happen than will happen, which is really 0:11:27.679 --> 0:11:32.520 a variation of the classic definition of risk, which is 0:11:32.600 --> 0:11:37.480 the possibility that your future expected returns will not be 0:11:37.559 --> 0:11:41.080 met and and that's a pretty simple definition as well, 0:11:41.120 --> 0:11:44.640 but they both sum up. Hey, you know, if markets 0:11:44.640 --> 0:11:47.720 return x a year, let's use ten percent over long 0:11:47.760 --> 0:11:49.920 periods of time. There are certain years where you're not 0:11:49.960 --> 0:11:53.440 going to get ten per and that's risk, at least 0:11:53.920 --> 0:11:55.800 to an investor who may need the money at a 0:11:55.840 --> 0:11:58.160 specific date in the future. Part of the issue, I 0:11:58.200 --> 0:12:01.120 think is that if you're an academic and you're trying 0:12:01.120 --> 0:12:05.080 to create a essentially a mathematical model, you need you 0:12:05.120 --> 0:12:07.960 need some number, some input that you can put in 0:12:08.000 --> 0:12:11.200 that model. And so what are you going to get 0:12:11.200 --> 0:12:14.760 to measure risk? What's the number? Volatility is a number, 0:12:14.920 --> 0:12:18.320 So maybe that's the closest you can come and it 0:12:18.440 --> 0:12:22.719 and it responds to John's reference of of drawdowns if 0:12:22.720 --> 0:12:25.480 you need if you have a specific liability at a 0:12:25.480 --> 0:12:28.839 future date, and right before that date, one of these big, 0:12:28.920 --> 0:12:32.080 ugly drawnouns of cars. Just look at what took place 0:12:32.080 --> 0:12:35.959 in the fourth quarter and the first quarter of en 0:12:36.000 --> 0:12:38.440 If you needed that money in December, you were in trouble. 0:12:38.520 --> 0:12:41.160 If you could wait till April, Hey, it's all everything's 0:12:41.200 --> 0:12:45.080 coming up roster. So it's not true risk, but it's 0:12:45.160 --> 0:12:49.160 volatility combined with liability. Is that that a fair statement? 0:12:49.320 --> 0:12:52.360 I think I think it is that sits following on 0:12:52.520 --> 0:12:56.960 from what's from what Christine just says. Yes, it's important 0:12:57.080 --> 0:12:59.600 to have a number, but there is a risk that 0:12:59.640 --> 0:13:02.760 you drift into the fallacy. This is a comment that 0:13:02.800 --> 0:13:04.800 all one person made you drift into the fallacy of 0:13:04.880 --> 0:13:09.080 the street light effect. I didn't know until now where 0:13:09.080 --> 0:13:11.640 the street light effect name comes from. It's about a 0:13:11.720 --> 0:13:15.280 drunk who is looking for his keys underneath the street lights, 0:13:16.000 --> 0:13:18.320 and the policeman asked, you're sure this is where you 0:13:18.400 --> 0:13:20.360 dropped them, and he says, well, no, but this is 0:13:20.360 --> 0:13:22.960 where I can see I mean, and that is I 0:13:23.000 --> 0:13:25.160 mean back to the financial crisis and what were some 0:13:25.200 --> 0:13:27.960 of the mistakes is that the data that was available 0:13:28.040 --> 0:13:32.120 on housing prices was plugged into everybody's risk model on 0:13:32.840 --> 0:13:36.760 you know, that's my second flag because we have multiple 0:13:36.920 --> 0:13:42.400 examples of enormous draw downs in housing prices which nobody 0:13:42.440 --> 0:13:46.280 wanted to answer into their system, the biggest clearly being 0:13:46.840 --> 0:13:51.520 the Great Depression, whereby some measures, New York City real estate, 0:13:51.559 --> 0:13:55.960 film value, and real estate collapsed around the country in price. 0:13:56.240 --> 0:13:58.960 But there are other examples in California in the nineteen 0:13:59.040 --> 0:14:01.280 eighties and New York. But but it wasn't the argument 0:14:01.320 --> 0:14:05.520 that nationally housing prices have. And I agree with you 0:14:05.559 --> 0:14:08.240 on the on the Great Depression, but they probably that's 0:14:08.280 --> 0:14:12.080 not gonna happen on average. But real estate is local. 0:14:12.200 --> 0:14:14.200 And the joke is if my head's in the oven 0:14:14.240 --> 0:14:18.000 and my feet are in the freezer on average, I'm comfortable. Well, okay, 0:14:18.000 --> 0:14:21.080 but I'll just say that the models that were employed 0:14:21.360 --> 0:14:24.320 did not use data. Yes, whether it was available or not, 0:14:24.400 --> 0:14:28.880 I agree, they chose to use recent data, which basically 0:14:28.920 --> 0:14:31.760 told them what they wanted to hear, so their free 0:14:31.800 --> 0:14:34.560 light was a little too narrow. That's that's exactly right. 0:14:34.640 --> 0:14:37.920 But but that goes to your point that models get 0:14:37.960 --> 0:14:40.160 pushed too far. And if it's garbage and garbage out. 0:14:40.200 --> 0:14:42.080 If we're only going to take an era, we're not 0:14:42.080 --> 0:14:43.800 gonna go out of sample, we're not gonna go into national, 0:14:43.840 --> 0:14:45.880 we're not gonna go back a hundred years. We're only 0:14:45.880 --> 0:14:49.880 going to use The ultimate back test is only use 0:14:50.000 --> 0:14:52.080 data that gives you the result that you want. And 0:14:52.120 --> 0:14:54.560 Burnstein makes that argument. I mean, he does say in 0:14:54.600 --> 0:14:57.680 this book that your your models are only good as 0:14:57.680 --> 0:15:00.160 good as the data you have, and so he was 0:15:00.200 --> 0:15:02.800 aware of that. But it's interesting how far the models 0:15:02.800 --> 0:15:06.840 were pushed without understanding that. One of the one other 0:15:06.880 --> 0:15:10.440 interesting thing is how much you see in the book 0:15:10.840 --> 0:15:15.360 how some of these models are based on simplifications which 0:15:15.400 --> 0:15:18.400 the people know they're making in order to be able 0:15:18.400 --> 0:15:23.200 to render it um u usable at all. Now, the 0:15:23.560 --> 0:15:26.440 one example I'm really thinking of here is Bill Sharpen 0:15:26.520 --> 0:15:30.720 the concept of beta, so that the idea, the idea 0:15:30.800 --> 0:15:34.040 that the whole, the whole basis of the valuation of 0:15:34.040 --> 0:15:37.560 a stock is based on its sensitivity to the market 0:15:37.760 --> 0:15:41.800 as it's one most important overriding factor. And the reason 0:15:41.880 --> 0:15:46.880 that he came up with that because yes, it is 0:15:46.920 --> 0:15:50.640 more probably that's the single most important factor in why 0:15:50.960 --> 0:15:53.520 most chair prices move. But the reason he came up 0:15:53.520 --> 0:15:56.760 with that is for for to make it calculable, because 0:15:56.880 --> 0:16:00.640 you had to have one overriding factor and then add 0:16:00.720 --> 0:16:04.520 on others thereafter. If you wanted to make the math doable, 0:16:04.640 --> 0:16:09.040 you need a number. And and you know, beta, particularly 0:16:09.080 --> 0:16:11.440 with the growth of passive investing, arguably is even more 0:16:11.480 --> 0:16:16.320 important than it used to be, but excus attention in 0:16:16.360 --> 0:16:20.320 ways that might be dangerous, and it helps it because 0:16:20.760 --> 0:16:24.240 it's such a nice, clear cut number. It gives us 0:16:24.520 --> 0:16:28.440 the comfort of a clear answer that we forget that 0:16:28.560 --> 0:16:34.680 it was based on what was knowingly a simplification when 0:16:34.720 --> 0:16:37.760 it first came out. The reason we are calculating things 0:16:38.400 --> 0:16:41.040 with the notion that beta is the single most important 0:16:41.040 --> 0:16:44.280 element of the return of a stock is because it 0:16:44.400 --> 0:16:46.840 was just too difficult to calculate if you were going 0:16:46.880 --> 0:16:49.440 to have a number of different factors. That chapter in 0:16:49.480 --> 0:16:55.440 a later chapter references the variance and the correlation between individuals, 0:16:55.800 --> 0:16:59.800 variants between different parts of portfolio, but also how margin 0:17:00.080 --> 0:17:04.080 visual stock will trade relative to the market. And something 0:17:04.640 --> 0:17:08.159 I have been told since I first started trading stocks 0:17:08.160 --> 0:17:10.719 a hundred years ago is that a third of the 0:17:10.800 --> 0:17:14.479 price movement is the stock, a third is the market, 0:17:14.520 --> 0:17:18.240 and a third is the sector that's referenced in the book. 0:17:18.400 --> 0:17:21.919 But nobody ever bothers to define that. Has that was 0:17:21.960 --> 0:17:25.800 that tested in here? Has anybody actually said, well, here 0:17:25.800 --> 0:17:28.080 are all the correlations? Are we just all taking that 0:17:28.200 --> 0:17:33.400 for granted? I think Farmer in French tested it did well. 0:17:33.400 --> 0:17:38.000 They did enormous empirical work which basically disproved the contention 0:17:38.600 --> 0:17:42.439 that market sufficient in my opinion, And yet reached the 0:17:42.520 --> 0:17:46.560 conclusion that markets were efficients, but that here were all 0:17:46.600 --> 0:17:51.320 these inefficiencies that could be explained somehow or other startastics. 0:17:51.400 --> 0:17:53.439 I don't, I don't quite. I think they did a 0:17:53.440 --> 0:17:57.720 brilliant piece of empirical work, and it's wonderful that they 0:17:57.760 --> 0:18:02.199 published something which basically suggested the original hypothesis is wrong. Well, well, 0:18:02.280 --> 0:18:04.399 I'm not quite sure that I agree with them that 0:18:04.720 --> 0:18:09.880 the original hypotheses is right. Nevertheless, you need a catchy 0:18:10.119 --> 0:18:14.639 nomencl you need a catchy title, and the mostly kind 0:18:14.680 --> 0:18:18.840 of sort of eventually efficient market hypothesis. I don't know 0:18:18.880 --> 0:18:21.520 if that's when any Nobel prizes, even though it's much 0:18:21.560 --> 0:18:25.600 more accurate. Yes, well, I mean the problem with the 0:18:25.640 --> 0:18:28.560 efficient market hypothesis that's it relies on a lot of 0:18:28.560 --> 0:18:31.560 people going in and trying to beat the market. Um, 0:18:31.640 --> 0:18:35.040 which we've seen and and some people let's talk about 0:18:35.080 --> 0:18:38.520 Professor Andrew Low and m I T. He's argued that 0:18:38.640 --> 0:18:43.720 you need five or six active market participants ninety plus 0:18:43.760 --> 0:18:47.800 percent can can index, and that should be enough to 0:18:48.200 --> 0:18:52.159 for for price discovery to work. Um, but what's in it? 0:18:52.240 --> 0:18:57.119 At some point? What's in it for the active market participants? Well? So, 0:18:57.119 --> 0:18:59.440 so now I'm gonna I'm just gonna keep dropping names. 0:18:59.440 --> 0:19:03.520 Michael mob Us on the Paradox of skill, effectively says 0:19:03.600 --> 0:19:08.440 that you it's not hard to beat the market because 0:19:08.880 --> 0:19:10.960 people are dumb. It's that there are so many smart 0:19:11.000 --> 0:19:14.280 talented people and there just isn't that much outpha to 0:19:14.320 --> 0:19:17.640 go around. So maybe if many of these smart talented 0:19:17.640 --> 0:19:20.760 people go away, it's less competitive. And I don't know 0:19:20.800 --> 0:19:25.400 where the number is ten percent, Andrew's five percent, those 0:19:25.440 --> 0:19:27.800 folks will have an opportunity to beat the market. And 0:19:28.160 --> 0:19:30.760 some people say that what people believe to be a scale, 0:19:30.760 --> 0:19:34.639 it's actually blind luck. So let's talk about Bernstein personally 0:19:34.760 --> 0:19:37.919 for a minute, because what you just said seems so 0:19:38.080 --> 0:19:41.119 much of an era that may or may not be 0:19:41.280 --> 0:19:44.960 valid any longer. I was surprised in the book to 0:19:45.400 --> 0:19:49.800 read him discuss his clients and his own participation in 0:19:49.840 --> 0:19:53.080 the market. I had no idea that he was a 0:19:53.119 --> 0:19:56.720 professional investor and an advisor. I assumed he was a 0:19:56.760 --> 0:20:01.080 professor and or a historian based on how well researched 0:20:01.119 --> 0:20:05.199 and written Um The Power of Gold and and Against 0:20:05.280 --> 0:20:09.239 the Gods. These read like academic books that are just 0:20:09.359 --> 0:20:13.040 beautifully written. So here's the question, for a person in 0:20:13.119 --> 0:20:17.040 a post war era where the you know, the thundering 0:20:17.080 --> 0:20:20.120 herd of Merrill Lynch and and all the different things 0:20:20.119 --> 0:20:23.199 that we're taking place. In the fifties, sixties, seventies, it 0:20:23.320 --> 0:20:29.520 seemed like stock ownership was moving from a rarefied wealthy 0:20:29.640 --> 0:20:35.480 person's hobby too fully democratized and here we are now 0:20:36.240 --> 0:20:40.240 back to bigger levels of of wealth inequality, and it 0:20:40.320 --> 0:20:44.480 seems what, what's the stat everybody likes to throw out 0:20:44.960 --> 0:20:47.720 the stocks and roun by the top ten percent something 0:20:47.760 --> 0:20:51.399 like that the top one percent owns so have was 0:20:51.480 --> 0:20:56.440 Bernstein of the moment in democratization and extrapolated that trend 0:20:56.440 --> 0:20:59.720 out forever? Did he? Did he? Or am I overstating that? 0:20:59.760 --> 0:21:01.720 And just I would just say, I mean one point 0:21:01.760 --> 0:21:05.680 he makes is that in you know, uh, capitalist countries 0:21:06.080 --> 0:21:08.600 like the US at the time he was writing, it's 0:21:08.640 --> 0:21:11.960 assumed that markets are good, and the countries that were 0:21:12.000 --> 0:21:15.520 coming out of the Soviet you know world like more. 0:21:15.680 --> 0:21:18.199 You know that Poland was very excited about having a 0:21:18.240 --> 0:21:22.200 stock market. So there has been a democratization of markets globally. 0:21:23.040 --> 0:21:25.879 So what's interesting, and we've documented a little bit in 0:21:26.280 --> 0:21:29.560 various articles we've written, is that if you look in 0:21:29.680 --> 0:21:32.960 some what you call developing markets around the world, they're 0:21:33.160 --> 0:21:37.879 very keenly developing these public markets, whereas some of the 0:21:37.960 --> 0:21:41.520 more sophisticated markets are now going into more private markets. 0:21:41.520 --> 0:21:44.960 And so I I just find that fascinating. Whether there's 0:21:45.000 --> 0:21:47.720 a sort of a the you know, a curve at 0:21:47.720 --> 0:21:52.560 which you know, societies go beyond private markets into this 0:21:52.600 --> 0:21:58.640 world of making privately owned companies more you know, widely 0:21:58.680 --> 0:22:01.199 owned or more of an investment, an opportunity. We have 0:22:01.359 --> 0:22:05.399 a very specific legislative history with the Jobs Act under 0:22:05.400 --> 0:22:10.600 President Bush that basically change the game for private companies. 0:22:10.640 --> 0:22:13.119 And it's not a coincidence that what is it a 0:22:13.160 --> 0:22:16.719 decade later we have all these unicorns billion plus doll 0:22:16.800 --> 0:22:19.439 evaluations that haven't gone public. Well, and you would have 0:22:19.440 --> 0:22:21.919 had no choice, but and you have you have you know, 0:22:22.040 --> 0:22:25.360 lots of pension funds that owned venture capital, they own 0:22:25.400 --> 0:22:27.600 private equity. Right, So in a way, even though it 0:22:27.680 --> 0:22:32.280 through multiple layers of institution, you have the average person 0:22:32.480 --> 0:22:37.200 owning pieces of non public companies, the average person through 0:22:37.440 --> 0:22:41.719 I mean public they employees through their own and others, 0:22:41.920 --> 0:22:46.320 you know you and yeah, it's still small. But I 0:22:46.359 --> 0:22:48.040 think the question is and I think a lot of 0:22:48.040 --> 0:22:50.159 people in the industry would say that's the future. I mean, 0:22:50.200 --> 0:22:53.760 you hear some quant traitors talk about bringing quant strategies 0:22:53.800 --> 0:22:57.119 to private equity. Um, I don't see why you couldn't 0:22:57.160 --> 0:23:00.320 have an overlay of quants onto anything that could be 0:23:00.359 --> 0:23:05.239 reduced to a mathematical basis. The problem with that is 0:23:05.359 --> 0:23:11.360 so much of this seems to be intuitive and um, 0:23:11.400 --> 0:23:15.600 what's the word I'm looking for, um, driven by human judgment. 0:23:15.640 --> 0:23:18.560 There are areas where machine learning and AI and technology 0:23:19.359 --> 0:23:23.360 are clearly supplanting human judgment. I am I'm not so 0:23:23.400 --> 0:23:27.280 sure that that a VC and and p E or 0:23:27.359 --> 0:23:29.840 the places where that's going to happen, although I could 0:23:29.880 --> 0:23:33.360 be completely wrong. Well, and there's those liquidity at you. Well, 0:23:33.400 --> 0:23:37.119 that's the always the liquidity premium for vench capital and 0:23:37.160 --> 0:23:40.560 private equity, and the same thing with gated withdrawals and 0:23:40.560 --> 0:23:43.200 and um, you know lock up periods for hedge funds. 0:23:43.240 --> 0:23:47.920 You end up with, is it purely a liquidity premium 0:23:48.040 --> 0:23:51.399 or is that just you know, something to create a 0:23:51.440 --> 0:23:55.760 little smoothing for managers. Not On the subject of liquidity, 0:23:55.880 --> 0:23:58.399 we've actually managed to come to the second big points 0:23:58.520 --> 0:24:03.480 that people made in their sponsors to um. There is 0:24:03.720 --> 0:24:07.439 very little. The word liquidity does not occur half as 0:24:07.560 --> 0:24:11.120 much as you think it's would in a book about 0:24:11.160 --> 0:24:14.760 all these fundamental ways in which people go about allocating 0:24:14.760 --> 0:24:21.000 their assets in public markets, and not unreasonably a lot 0:24:21.040 --> 0:24:24.479 of these these these people are geniuses that we're covering. 0:24:24.520 --> 0:24:26.720 Most of them at the time they were developing their 0:24:26.760 --> 0:24:31.240 theories had little or no experience of actually trading in markets. 0:24:31.280 --> 0:24:34.840 They were very interestedly looking at lots of data and 0:24:35.160 --> 0:24:39.679 bringing very fresh perspectives to it, and they were certainly 0:24:39.800 --> 0:24:46.240 operating in an era before the degree of liquidity that 0:24:46.280 --> 0:24:50.959 we have found in the recent years was possible, and 0:24:51.040 --> 0:24:57.159